When I worked for NBC and CNBC many years ago, it was owned by General Electric GE, +0.83%. Its legendary chief executive, Jack Welch, had a mantra that has stayed with me through the years: “Change now before you’re forced to later.”
It’s good advice, and it’s certainly true for the biggest federal program, and one that has — or will have — a huge impact on you: Social Security.
We have to change this vital program now, before we’re forced to later.
The problem is well-known; we’ve been talking about it for years: More money is being paid out to Social Security recipients than is coming in. Earlier this year, the Social Security trustees (led by chief trustee, and Treasury secretary, Janet Yellen) estimated that, unless fixes are made, the Social Security trust fund will run out in 2033 — one year earlier than last year’s estimate. Once the trust fund runs out, retirees would get an estimated 77% of their benefits.
Read: This is what the average retiree will lose if Social Security isn’t fixed
These aren’t political talking points. They’re cold, hard facts. The clock keeps ticking, and the politicians haven’t done anything. Democrats, Republicans — nothing. They just keep talking around the problem, attacking each other, trying to score political points. The clock keeps ticking.
The solutions are well-known, too: Raise payroll taxes, eliminate the cap that limits how much big earners pay into the system (this year, earnings over $160,200 aren’t subject to Social Security taxes) or raise the eligibility age.
Read: As Social Security turns 88, it needs to be strengthened — not cut
The politicians we keep sending to Congress haven’t done anything because these steps involve inflicting pain on voters, something no politician likes to do.
But perhaps there’s another way.
Three decades ago, Sweden faced the same problems America does now: a declining birthrate, people living longer and a pay-as-you-go system that couldn’t make ends meet. Centrist politicians to both the left and right agreed (imagine that) that something had to be done.
Read: What if Social Security didn’t exist?
Their solution involved a couple of things. The biggest is something that has been discussed here but hasn’t really gone anywhere: partial privatization. If your default position is, “No, that’s a terrible idea,” take a minute to see what the Swedes have done.
Instead of putting 100% of payroll taxes into an equivalent of our Social Security trust fund, the Swedish government withholds a portion — equal to about 2.5% of wages — and deposits it into individual pension accounts. Workers can invest their own money in up to five different funds offered by independent fund managers. What if you don’t want to choose, or you aren’t sure what’s best for you? There’s another fund that automatically does it for you, and you can modify it at any time.
Read: Here’s a way to save Social Security that doesn’t raise taxes or cut benefits
Of course, there’s more to it than this, but the basic construct of allowing partial privatization — based on 30 years’ worth of data — is nothing to sneeze at. Even taking into account normal market ups and downs, bear markets and financial crises, Sweden’s equity market, like our own, has inevitably gone higher.
Some commentators say retirement funds could be wiped out during a market crash. But the Cato Institute’s Johan Norberg notes that this “ignores that the money isn’t all invested or withdrawn at the same time, meaning that the performance in a single year isn’t crucial.” In other words, privatized assets, which again are limited to begin with and are invested over the course of a long working career, have had ample time to compound, and can only be paid out little by little each month.
A recent study of 75 Social Security–like systems around the world by Allianz, the Munich-based asset-management firm, had praise for only three: those in Denmark, the Netherlands and Sweden.
All have one thing in common: “[T]hey set the course for sustainability very early on, at a time when the demographic bomb was still ticking quietly. They can therefore serve as a model for many developing countries, which also still have a window of opportunity to stabilize their pension systems. In many other countries, however, it will hardly be possible without painful reforms.”
We’ve had chances to go this route before: In his 2004 State of the Union address George W. Bush proposed the partial privatization of Social Security. “Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account,” he said. “We should make the Social Security system a source of ownership for the American people.”
That was 20 years ago — Jan. 20, 2004, to be exact. The S&P 500 SPX that day closed at1,138. As I write this, the benchmark index stands at 4,518. That’s after the horrific 2008 meltdown, the 2010 “flash crash,” the pandemic meltdown and all the rest. Of course, as investment companies are required to say, past performance is no guarantee of future results. But if Social Security could somehow be tweaked to allow even just a small portion of assets to be moved into other assets — with you deciding what’s best for you — well, what’s wrong with that?
That projected 23% cut in your benefits is approaching, and the clock continues to tick. Perhaps it’s best to change now — before we’re forced to later.
This article was originally published by Marketwatch.com. Read the original article here.
